Definition of value at risk

In this context, we use the term "risk" to describe a possible loss that may occur due to uncertainty about future developments. Only market price risks, i.e. risks of a negative change in the value of individual instruments or portfolios made up of them compared to a reference value as a result of possible changes in market parameters (so-called risk factors), are taken into account here.

This market price risk is expressed using the value at risk (VaR), a downside risk measure.

Definition of

The value at risk of an instrument or portfolio is the maximum expected loss over a specified period that will not be exceeded with a certain probability under normal market conditions.

It is clear from this definition that in order to determine the VaR for a risk factor, instrument or portfolio, the probability distribution of gains and losses for the selected period is required. As this is generally unknown, financial mathematical models are used to estimate this or an approximation of the VaR.